Smart, or digital, contracts are a feature of blockchain, the decentralised ledger system that allows the transfer of property, goods, money and anything else of value.

Digital contracts automate business processes and store data across multiple computers connected by the internet. The databases are visible to all involved parties and allow real-time adjustments that are constantly crosschecked and updated.

“A smart contract is computer code hosted on a blockchain that defines and executes the terms of an agreement between parties,” says Ken Cottrill, co-founder and research principal at Chain Business Insights. “Given their versatility, the range of potential applications in the supply chain domain is vast.”

The report identifies and elaborates on several benefits of smart contracts including verification, visibility, lower costs, self-execution, clarity of agreement terms, fraud protection and connectivity.

The authors stop at hailing smart contracts as complete remedy to the issues faced by supply chains. Implementation is a challenge. The complex nature of legal contracts and a lack of standards and protocols offer a difficult path to navigate.

A proof of concept case study involving 88 bales of cotton shipped from Texas in the US to Qingdao in China proved to be successful. Blockchain’s ability to track shipments allowed it to send a notification for release payment once the product was in transit.

Wells Fargo made the payment to The Commonwealth Bank in Australia (CBA) in the first global transaction to utilise smart contracts.

“Several companies recognise the applicability of smart contracts to the supply chain space,” says Peter Harris, co-founder and research principal at Chain Business Insights. “IBM, Maersk, Microsoft and SAP Ariba are among the first to engage in proof of concepts, but we expect that list to expand rapidly.”